Diminishing Volatility in the Dollar

July 16, 2014

Currencies are sharing in the phenomenon of scant volatility seen this year in many financial markets.  2014 is now 54% completed.  The most influential currency pair, EUR/USD, has fluctuated between a high of 1.3993 and a low of 1.3475, a high-low band of just 3.8%.  Dollar/yen’s trading band of 105.49 to 100.73 so far this year is just 4.7% thick, and cable’s corridor (that is the dollar’s value against sterling) has traced a width of 5.8% with high of 1.7191 and a low of 1.6248.

The table below compares the high-low range widths for the dollar this year up to July 16 with trading widths in January 1-July 16 of the previous four years.  The high-low spreads this year are lower than in all the four previous years for all three dollar pairs.  In the case of the euro, the dollar’s range got progressively smaller over the past five years.

Hi/Lo Width EUR/USD USD/JPY GBP/USD
1/1 – 7/16/14 3.8% 4.7% 5.8%
1/1 – 7/16/13 7.6% 19.9% 10.6%
1/1 – 7/16/12 10.6% 10.8% 7.0%
1/1 – 7/16/11 16.0% 12.2% 8.7%
1/1 – 7/16/10 22.8% 10.1% 15.6%

 

To take an even broader view, I divided the same three dollar relationships during the 15 1/2 years of the euro’s existence into three segments, 1999 – 2004, 2005 – 2009 and 2010 to the present.  The high/low range widths are presented in a second table below.  EUR/USD has experienced a progressively shrinking range, and sterling has traded most narrowly in the most recent period. 

  EUR/USD USD/JPY GBP/USD
1999 – 2004 66.1% 35.4% 42.9%
2005 – 2009 37.8% 46.3% 56.7%
2010 – Now 25.8% 39.6% 20.7%

 

Anecdotal evidence of diminishing dollar volatility tends to be more remarkable than the above comparisons.  Can you imagine the euro appreciating over 30% and squandering that entire gain all within the confines of a calendar year?  That happened to the mark in 1973, the opening year of market-determined dollar values.  Between February 1985 and end-1987, the yen and mark each advanced about 120% against the U.S. currency.  Once in September 1984 over the space of 24 trading hours divided by a weekend, the dollar jumped 10% against the mark. 

Numerous theories are being postulated to explain the lack of volatility in financial markets.  Only with the passage of time may it become more apparent how enduring this development is and what are its most significant causes.  Suffice it to say, being a currency market watcher has lately been like watching paint dry, in other words excruciatingly boring.  Even stranger for we old-timers in the field, it seems ironic that these days there are many on-line currency trading platforms to tempt day traders to try their luck and skill.  Back in the day, currency trading was a professional interbank game with excitement far transcending what one observes these days.  Part of me thinks it’s a shame that the technology wasn’t around in the 1970s, but another part believes that technology is a big reason when currency market action is so much calmer.  And one has to wonder what’s driving people from all walks of life to seek their fortunes in this field?  Macroeconomic surprises continue to thrill but not the currency market responses.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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